An Epidemic for Malaysia’s Economy

By Dr Felicia Chong – Lecturer in School of Accounting & Finance, Faculty of Business and Law at Taylor’s University

According to JPMorgan analysts, the COVID-19 pandemic in Malaysia will peak in mid-April 2020 with a serious impact on the country’s economy. Several economic activities expected post-outbreak include decrease in domestic consumption and national production followed by reduction in investments. Furthermore, business confidence and entrepreneurial activities will also be reduced, negatively affecting future business development.

Reduction in Chinese travelers causing worldwide tourism crisis

Contributing to 5.9% of the GDP, tourism is an important sector in Malaysia for which, international tourism accounts for a significant percentage of the national income.

However, the decline in Chinese travelers have an adverse effects in Asian economies, including Malaysia. Asian Development Bank estimated that the number of outbound tourists from China increased from approximately 10 million in 2003 to close to 87 million in 2018 with an average expense at RM8,500 [1]. For Malaysia, more than 3.1 million Chinese tourist visited the country in 2019.

The COVID-19 does not only affect Chinese tourists. Majority of flight bookings to Asia Pacific area have decreased by 98% between January and March 2020 [2] - given the fact that Singapore, Indonesia and Thailand respectively account for more than 10; 3.6 and 1.8 million visitors in Malaysia[3], the tourism sector has taken a big hit.

Local tourism has also taken a hit with the Restricted Movement Order. During the outbreak, reservations in restaurants have decreased significantly, between 80% and 95% depending on the country [4] - and Malaysia is not immune to this. To illustrate the impact of this outbreak, it can be comparable to SARS in 2003 which caused a 17.42% decline in Chinese tourists, leading to an estimated loss of RM4 billion. Looking at COVID-19, the Asian Development Bank estimated that the tourism industry will expect a loss between RM 2.3 to RM 5.7 billion.

A hole in the workforce

As a result of the Restricted Movement Order (RMO), most businesses have been forced to temporarily shutdown as a precaution. If the RMO situation continues for several weeks, it can cause a major disruption in the manufacturing sector.

The industrial production in China, for instance, dropped by 13.5% in the beginning of January. Similarly, Malaysia will also face a similar issue. With factories being shutdown, workers may be layed-off. Primarily, the hard labour workforce will take the biggest hit – this is not a good news for many B40 families. It is estimated that this pandemic will bring about 2.4 millions job losses in Malaysia.

Travel bans and other general restrictions will limit the movement of goods and capital. Such situation may lead to the reduction of business investment in the country and corporate bankruptcies, increasing the pressure on the banking and financial system.

Fall in domestic consumption

Due to a change in consumer behaviour, domestic consumption will also experience a sharp but temporary fall. Based on past observations of SARS outbreak, specialists (Asian Development Bank) estimated that retail sales growth could decline by approximately 3% per quarter. However, depending on the length of the COVID-19 outbreak, this negative shock could eventually be bigger than what was observed in 2003. The Malaysian car industry (contributing up to 4% in GDP) might also face a difficult year in 2020.

Given the severity of the current outbreak and by integrating the fact that the RMO will be extended until mid April, the MIER projected that the domestic demand might sharply decrease by 12% for 2020.

Short-term and long-term stimulus package is needed

Amid difficult situation facing the country’s economy, there are several rooms for actions in the short and long run to adapt to the lasting impact that has taken place on all sectors. These short- and long-term actions will have to deal with a list of key for the Malaysian economy: the community, technology, healthcare, science, governmental roles, economy and lifestyle. For instance, a short run monetary stimulus could be given to assist the economy.

Recently, the Government has evoked a list of measures to ease the economic situation of individuals, SMEs and corporate. This involve credit management, loan restructuring, and debt management options through partial EPF withdrawals for debt or early loan settlements. The major ojective of the recent government’s stimulus plan is to protect households and to generate a context in which SMEs will have enough liquidity to ensure a fast recovery of the economy in the short-term.

Long-term economic policy can include contingent plans for pandemic situations like the COVID-19 and SARS. Future economic blueprints should give more emphasis to potential interruptions and revival plans in health, education, and businesses. The Government’s stimulus integrates such aspect as it includes public investment in internet coverage and digitalisation of companies.

Clearly, the current situation has given a flavor of what could reshape our society. What used to define real activities driving economic functions and outputs are challenged and have to be redefined. Throughout this crisis, the way people consume and invest have changed tremendously. When this outbreak is under control, long-term economic alternative can be explored to include innovative entrepreneurial/economic activities to face such unprecedented situation.